Back to School: History of Stock Market Returns


by Jeff C. Johnson

Want to know what the "market" is going to do? You're not alone. Everyone, including me, would like to know.

But even after over 30 years of investing money and observing the markets, I don't know what the market is going to do in the near term, and even more important, I don't know anyone who does know with any consistency over short periods of time.

There is some historical evidence that you might find helpful, however. If you study the long-term results of stock market investments, there is some reason to believe that positive returns can be generated for long-term investors.

The question you might ask: "How long is long term?"

Here's your assignment: Pick an average investment with a long-term history and examine the return for every calendar year. Then, look at every rolling five-year period (for example, 1940 to 1945, 1941 to 1946, 1942 to 1947, and so on) and determine what the average annual return was for each five-year period.

Next, look at rolling historical returns for longer periods of time, such as 10 years, 20 years, and 40 years. See if there is more consistency of results, from a historical perspective, for the longer investment periods.

While the past isn't prologue, the results will give you a good indication of what "long term" is for investment holding periods for your stock investments. Stock investments for short periods of time might work out for you, but expect that the speculative nature of the investment is greater if you have a short-term expected holding period.

A summary of what your findings might be is in chapter 12 of The Extreme Retirement Planning Workbook.